In the final mainstage panel discussion of the National Association of Corporate Directors’ (NACD) 2017 Global Board Leaders’ Summit, Richard Edelman, the CEO of communications marketing firm Edelman, spoke with Nicholas Donofrio and Helene Gayle about how corporate culture drives long-term value. He preceded the conversation by offering some sobering statistics. Since 2001, Edelman has researched and measured the trust invested in business, nongovernmental organizations, media, and government by the public. It found that, around the world, only 47 percent of the general population thinks these institutions are trustworthy.
Little more than half (52%) of respondents say they trust businesses. CEO credibility dropped in all countries surveyed, reaching an all-time nadir of 37 percent. Fearful over disappearing employment opportunities, people perceive their current way of life as being threatened, resulting in a rise in protectionist, antitrade sentiments. In addition, looking at survey responses from the investor community, 76 percent of investors indicated that companies should address one or more social issues, ranging from employee education and retraining to environmental issues.
From Edelman’s point of view, business is the last fortification defending public trust in our age-old social institutions. “The board matters,” Edelman said. “Reputation matters. Are you engaged when a company is considering the issues of the day? You have to be. You can’t sit back and let management do this themselves.”
When looking to solve the widespread issue of flagging trust in businesses, directors may do well to take a look at corporate culture. Healthy corporate cultures help drive bottom-line results, increase customer satisfaction, and attract top talent at all levels of the organization. And in the past year alone, media headlines in industries ranging from banking to healthcare to entertainment to automotive manufacturing have highlighted examples of how deficient corporate culture can lead to financial and reputational disaster. As both a source of competitive advantage and as a potential risk, culture is a natural component of boardroom agendas. Yet all too often, it is regarded as a secondary human-resources issue that gets directors’ attention only when a problem arises. In NACD’s most recent public company governance survey, less than half of directors reported that their boards assessed the alignment between the company’s purpose, values, and strategy in the last 12 months.
To upend the common perception of culture as a soft issue, NACD convened directors and governance professionals to develop practical guidance that directors can use to enhance their culture-oversight practices. The resultant publication, The Report of the NACD Blue Ribbon Commission on Culture as a Corporate Asset, makes ten recommendations on culture oversight and offers associated action steps and tools for directors. Donofrio, a director of Bank of New York Mellon, Advanced Micro Devices, and Delphi Automotive PLC, and Gayle, a director of the Coca-Cola Co., the Rockefeller Foundation, and the Center for Strategic and International Studies, co-chaired the commission.
“In many ways, the issue of trust is aligned with issues of culture,” Gayle observed. “While we have a sense of what our culture is, we haven’t defined it and put those pieces together so that culture can be a unifier across those issues.”
“It truly is not just about [financial] results anymore,” Donofrio added. “It’s about what you did and how you did what you did.” And if board members have concerns about how those results were achieved, it’s time to start asking the CEO and management team questions about the beliefs, protocols, and procedures underpinning the company’s performance. If the chief executive is resistant to examining these issues in an open dialogue with directors—or, worse, is taking positions contrary to the company’s espoused culture and values— that is a sign the company does not have the right leadership in place. As Gayle emphasized, “Creating and managing the company’s culture is the responsibility of the CEO and management team. Culture oversight, and holding leaders accountable for a vibrant and healthy culture, is the board’s job.”
Regarding the rising importance placed on a company’s stance on social issues such as education, the environment, or free trade, Gayle advised that directors frame boardroom discussions on these matters in terms of how a given issue is aligned with the business and take into consideration the communities in which the firm operates and the customers it serves. When Edelman asked if board recruitment should include asking directors about their views on key social issues, Donofrio said that these discussions ultimately tie in to the director-recruitment process, where the criteria for board candidates should include their ability to contribute to and support healthy culture—in the boardroom and across the firm as a whole.
Gayle agreed. “How you relate to society is part of how the company sees itself and how the company expresses its culture. Having a well-thought-out position on how [a particular social issue] furthers the business, how it creates an environment of trust, and how it fosters talent—all those things have to do with culture.”
So much has changed, and so quickly. What will it take for businesses to truly flourish in the future? The second keynote of the 2013 NACD Board Leadership Conference was a smooth transition from NACD Chair King’s address on innovation in the boardroom with a presentation from Raj Sisodia. Conscious Capitalism Institute Co-Founder and Chairman Sisodia recently co-authored with Whole Foods Co-Founder John Mackey, Conscious Capitalism: Liberating the Heroic Spirit of Business.
Although capitalism is suffering an image crisis following the global financial crisis, Sisodia focused on its ability to advance society as a whole. He currently consults companies on shifting from a traditional method of operations to a “conscious” one. Based on research on the impact of the industrial revolution on social well-being, Sisodia believes that business is good because it creates value. His method of conscious capitalism is based on four tenets:
1. Business can and should be done with a higher purpose, not just maximizing profits.
2. Conscious businesses are explicitly managed for the benefit of all their stakeholders.
3. Conscious leaders are driven primarily by service to the firm’s purpose and people, rather than by power or money.
4. These leaders create a conscious culture, which enables and empowers employees.
Other takeaways from the session:
Capitalism is the most effective method to alleviate poverty. If current trends continue, extreme poverty (world population living on less than $1 a day) will be virtually eliminated in the next 50 years (if free markets are allowed to spread and be the norm).
“Have you ever watched a movie in which the business person is a good person?” The lack of trust in capitalism is the result of the world and humanity changing significantly in the last 20 years, yet business has not adapted.
In the future, companies will not be able to survive by only focusing on driving shareholder wealth. Ultimately, viewing financial profit as the end result will drive you to do things that destroy value in its path. To this end, Sisodia believes directors should focus on the corporation—not just the shareholders. In doing so, value will be created for all stakeholders.
Conscious capitalism is not about trade offs, but they can always be found. Although businesses create wealth, they can also destroy many kinds of wealth, including financial, social, and emotional. “It matters how companies make their money.”
The rate and complexity of change in the marketplace is greater than ever before—and not showing any signs of slowing. From innovation and disruptive technologies to regulatory activity and stakeholder scrutiny, companies are constantly presented with new risks and challenges. As NACD’s new Chair Reatha Clark King observed, writer William Gibson captured the inflection point most corporate boards find themselves approaching: the future is here, it’s just not evenly distributed. As these changes force global economic shifts, it is necessary for those in the boardroom to understand and prepare for the future structure of directorship now.
This week, NACD held the second in a series of exploratory meetings in Chicago to discuss how the boardroom can define and prepare for the challenges and opportunities expected in the next five to seven years. This meeting series—held in New York City, Chicago, and Los Angeles—will culminate in the kickoff of NACD Directorship 2020 at the 2013 NACD Board Leadership Conference. An effort to provide directors with a clear vision of what their roles will resemble in the future, NACD Directorship 2020 will extend from educational programs and roundtable exchanges to publications, all shaped by feedback from these events.
At the Langham Hotel in Chicago, more than 100 directors attended the afternoon session to discuss two topics: the future state of communications between the board and C-suite and how to select performance metrics that will generate sustainable organizational profit. Sessions were led by NACD President and CEO Ken Daly; Akamai Technologies Lead Director and Audit Committee Chairman Martin Coyne; NACD Chair King; and former Bell and Howell CEO, current NACD Director, and Northwestern University Professor Bill White. During the highly interactive sessions, each table was given a specific set of questions to discuss and provide thoughts among their peers. Takeaways from the event include:
Directorship is a part-time job with full time accountability. Inherent in the board/C-suite relationship is an information imbalance. However, with the right culture and board leadership, the board and senior management can easily communicate expectations and necessary information.
A CEO’s leadership style can serve as an indicator that the risk of information asymmetry has become too high. Directors establish a level of trust with the CEO and management to allow for board access to other members of the senior team, as well as site visits to see the company’s operations.
With an expanding board agenda, process and expectation setting are critical. The board should clearly communicate to management the types and format of information that need to be presented.
An empowered lead director or non-executive chair can help mitigate the risk of information imbalance. By facilitating communication channels and work between the independent directors and the CEO, this leadership position can break down some of the road blocks that may develop between the C-suite and directors. The relationship between the CEO and lead director or chair should be transparent.
Culture is critical in effective dialogue between the board and senior management. With the right culture, directors can be sure they are aware of the risks that are keeping the CEO up at night.
Sharing information via performance metrics, which are focused on what directors need to know, can bridge gaps in information flow. Ultimately, the board has to make winning decisions which are informed by data.
Today, directors balance short-term shareholder expectations with generating long-term sustainable profit. The role of the stakeholder, though, is more significant than ever before and expected to grow. In the future, directors will have to be increasingly focused on balancing shareholder return with stakeholder concerns.
It may be difficult for the board to address and to communicate with every stakeholder. The board should identify which stakeholders are critical to the strategic plans, and target communications to those groups.
Balance also extends to leading versus lagging indicators. The board should first approve the right strategy and set goals accordingly. Leading indicators will drive ensuing performance—but lagging indicators are also necessary to provide the right feedback loop.
Innovation is important to the success of any company. How innovation is defined, though, is largely dependent on the company, and should be rooted in the corporate strategy. For some, innovation will manifest in processes, products, or both.
The next NACD Directorship 2020 event will be held Sept. 10 in Los Angeles. Between events, NACD’s blog will feature viewpoints and research from our NACD Directorship 2020 partners—Broadridge, KPMG, Marsh & McLennan Cos., and PwC—that will take a deeper look into the emerging issues and trends that will redefine directorship.